Many news stories covering the release of data on new home sales in September highlighted the increase from August, presenting the new report as positive news. Such reporting really missed the boat. The August sales data had been revised sharply downward. The 770,000 annual sales rate reported for September was 25,000 lower than the 795,000 sales rate originally reported for August. The September rate is 23.3 percent below the sales rate of September 2006 and 37.0 percent below the September 2005 level. In fact, these comparisons actually understate the falloff in sales. These sales numbers do not include cancellations. Two years ago the cancellation rate was near zero. (Why cancel a home purchase when you can resell it to someone else for 10 percent more than you paid?) Many major homebuilders now report cancellation rates in the range of 30 to 40 percent. If we assume a cancellation rate of 15 percent, then the sales rate is down by almost 50 percent compared with its level of two years ago. A cancellation rate of 15 percent would mean that the 523,000 inventory of unsold homes reported for September is equal to nearly a full year of sales, a post-war record. This is not good news for the housing market.
--Dean Baker
